On Monday, July 24, ITC officially announced the demerger of its hotel business, confirming previous speculations. However, instead of a positive response from investors, the news led to a significant selloff in ITC’s stock. The shares experienced a sharp decline of 3.87%, closing at ₹470.90. Interestingly, during the same intraday session, the stock had surged to a fresh 52-week high of ₹499.60 before the selloff occurred. This volatility in the stock price indicates that the market’s reaction to the demerger news was mixed and influenced by various factors.
According to a regulatory filing made by ITC, the company’s board has given its in-principle approval for the demerger of its hotels business. Under the proposed scheme of arrangement, ITC will hold approximately 40% stake in the new entity, while the remaining 60% will be directly held by the company’s shareholders in proportion to their existing shareholding in ITC. This decision represents a significant step in the process of separating the hotels business from the main company.
The fall in ITC’s stock price following the demerger announcement can be attributed to several factors. One of the main reasons is the anticipation of only partial value unlocking after the demerger. Since ITC is retaining a 40% stake in the demerged entity, investors might perceive that the value unlocked through the demerger will not be significant.
Additionally, market experts point to a somber market mood, where investors may have been cautious and unwilling to take on additional risks. The sell-on-news action by traders, where some investors may have sold their shares after the announcement, could also have contributed to the decline.
The overall sentiment of the market, combined with the belief that the value unlocked may not be as substantial as initially hoped, could have played a significant role in the stock’s decline after the demerger announcement.
Value unlocking in a company involves reorganizing its different segments to reveal their hidden value. This can be achieved through demergers, spin-offs, divestitures, or strategic partnerships, among other methods, to showcase the individual worth of each part. By doing so, the company aims to improve its overall performance and attract more investors.
According to Shrey Jain, Founder and CEO of SAS Online, the 4-5% decline in ITC’s stock following the demerger announcement can be viewed as profit booking since the move was highly anticipated. He believes that the demerger will unlock value for ITC’s shareholders by creating a separate, listed entity for the hotel business.
This demerger is seen as a positive development for the Indian hospitality industry as well. Jain states that it reflects confidence in the sector, making it more appealing to potential investors. Furthermore, the increased competition resulting from the demerger is expected to benefit consumers in the long run.
As of the current year, ITC has emerged as one of the top-performing stocks in the Sensex index. Over the past year, the stock has witnessed substantial growth, gaining 39%, while the broader equity benchmark Sensex recorded a gain of 10% during the same period.
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